Redesigning Unemployment Insurance

How does unemployment insurance work?

From the worker’s perspective, unemployment insurance isn’t detectable unless the worker loses their job. Once that’s happened, the person can apply for benefits – a check that you can cash or deposit into your bank account. These benefits vary by state, with the composition of your family, and your income prior to separation. The most generous maximum benefit is provided by Massachusetts at $823 per week for an individual and the least generous is provided by Mississippi at $235 per week. States also vary by the length of time for which a person can collect benefits. Montana is the most generous at 28 weeks and North Carolina ties with Florida for the least generous at 12 weeks. If you find a job and become employed before the maximum benefit duration, then you stop receiving payments.

From the employer’s perspective, unemployment insurance is the premium that you pay per employee each year. The premium is not optional – so it’s a tax. Employers pay it for the privilege employing workers. There are two components of the tax: a state and federal portion. The federal portion is more or less constant per employee. The state portion changes with the incidence of unemployment claims and payments that a state makes in the prior year. When a lot of people get fired, state unemployment taxes rise as a policy response.

Why provide UI benefits?

There are two typical reasons for governments to provide unemployment benefits – and a 3rd not-so-typical reason. The first is as a matter of relief. People often lose a job through no fault of their own, and we don’t want those people to become destitute or to forego the bare essentials that money can afford. The second reason to provide benefits is as a matter of macroeconomic spending stimulus. Contrary to popular belief, this stimulus is not about encouraging greater production through greater sales. The stimulus is meant to encourage total spending in the economy to be higher than it would have been otherwise (See Irving Fisher on debt deflation and Scott Sumner on NGDP targeting). The 3rd and not so typical reason for governments to provide unemployment insurance is to keep people from going to work (See Tyler Cowen for why this might be desirable during a pandemic).

Incentives Matter

The 3rd reason above hints at a problem. People lose benefits when they become employed again. It is exactly because benefits provide relief that they reduce the incentive to find a job. Importantly, this is not a judgment of propriety or moral chastisement. It simply is the case that UI payments make being unemployed a little more tolerable. The tenacity with which people search for a job becomes a little less urgent. Anyone well acquainted with human nature (outside of a textbook) will tell you that it is good for humans to work. There are economic, social, and psychological benefits – not to mention the material benefits enjoyed by society. So, longer periods of unemployment are a problem.

Not only does the receiving UI benefits cause longer unemployment spells, losing benefits when you find a job acts as a penalty to finding a labor market match. It’s not happenstance that people who lose their UI benefits tend to become employed shortly thereafter. In terms of economic activity and gains from trade, society is materially better off when people find jobs more quickly (probably socially better off too). If you can get people to acknowledge the above logic, then there is plenty of room for people to disagree on the propriety of the UI benefits system.

Remove Disincentives – Keep the Relief

As Thomas Sowell is known for saying “There are no solutions – only trade-offs.”  That’s true. It’s also true that there is also no such thing as a free lunch. But some things are a lot more like a free lunch than others.

Wouldn’t it be nice if we could just help unemployed people and not disincentivize them from finding a job? In part it’s impossible. The UI payments do both and there is no separating them. But, the disincentive provided by removing payments when a job is found can be addressed. Why not just permit UI benefits even after someone has found a job?

An Outlay Neutral Prescription

What does the social program designer consider? Simply, the policy maker considers government outlays, government revenues, and economic impact. All else constant, policy makers like small outlays, high revenues, and good economic impacts.

I propose that states adopt the following policy. First, eliminate variables benefits. This part of the policy is not essential, but it clarifies the exposition. Now, it doesn’t matter whether you were an executive at a bank or a janitor at the bank – both receive the same weekly UI payment if they lose their job. What should the benefit be? For the purposes of outlay neutrality, the new benefit is the same as the average benefit was last year. The average benefit and total outlay across all claimants is unchanged.

When a person finds a job under the current system they are paying an implicit tax when their benefits get pulled. Let’s eliminate the employment disqualification. That’s right. When a person finds a job, they just continue to receive benefits. They don’t receive UI benefits indefinitely, however. In order to maintain outlay neutrality, the duration of UI benefit payments will be equal to the average duration last year.

Say what?!

Put yourself in the shoes of the person looking for a job under the current system. Say that your UI benefit is $800 per week and that you job-search for 10 hours each week. Say that you find a job that pays $1,000 per week. If you take the job, then you will go from working 10 hours per week to working 40 hours per week. And, you go from having an income of $800 per week to having an income of $1,000 per week. In other words, you get to work 30 more hours per week for $200 more income. The unemployed person is making the decision to take the job at $25 per hour, or stay home at $80 per hour ($1,000/40 Vs $800/10).

But what’s the perspective under the outlay neutral proposal in which the benefits continue even after employment? The decision is substantially different.  The unemployed person is making the decision to take the job at an average of $45 per hour, or stay home at $80 per hour ($1,800/40 Vs $800/10).

Of course, staying home still might look attractive. But it looks relatively less attractive than it did under the standard system of work-disqualifying benefits. If a person has 4 weeks of remaining benefits when they find the job, then continuing to receive UI benefits would mean that the total income over that month would be $7,200, versus $3,200 from staying home, or $4,000 under the standard system. Again putting yourself in the shoes of the unemployed, doesn’t this decision look different? Might you feel enticed to accept the job?

Under the proposed policy, government outlays are constant – there is no change in expenditures. Revenues increase because more employed workers means more employer-paid UI tax payments (not to mention other tax payments). Economic performance improves because greater employment increases total output. Let’s go ahead and throw in the additional social benefits too.

People Have Feelings

…And they’re complicated. Part of the sympathetic idea of unemployment insurance benefits is to provide relief. As a matter of gut instinct, this is why many people favor the UI transfer program over others. They can imagine themselves in such a circumstance through no wrong-doing of their own. But once we say that benefits will continue – even after someone finds their job – the UI program becomes less obviously a matter of sympathy-inducing relief. There is a political problem.

I say: put your feelings aside. Let’s get people employed again. Let’s increase tax revenues and increase economic activity. Let’s address the problem of unemployment in a better way – and spend not a dime more doing it.

Government Elimination of Perceived Vices

My post yesterday was about video games, prompted by the CCP legal restriction on video games for children. To enforce this rule, the government is making a list. Any adult playing these online video games will have to register with their real name. Is this a regulation of an addictive substance for minors, like we have for cigarettes, or is it progress toward managing the leisure time of males?

Before the Communists came to power (and before video games existed), previous Chinese government administrations had tried to ban another addictive form of recreation: smoking opium. The British famously did not help with this endeavor, but the British imports of opium ended years before the CCP crackdown. Where others had failed, the CCP practically eliminated opium from China in about 3 years. For my information, I’m drawing partly from a honors thesis on this topic.

The CCP started the relentless march toward eliminating opium in a clever way. They gathered information before announcing how ambitious the program would be. It started with making a list.

There had been previous attempts to send soldiers to destroy poppy fields (hello, 21st century?) but never in a coordinated enough way to stamp out supply. Police had raided opium dens in the cities, but nothing ever worked. Addicts were going to buy the stuff as long as it was being produced, and producers were going to grow the stuff as long as it was profitable. The CCP pulled off a coordinated attack on both producers and consumers in the entire country at the same time.

After a period of record-keeping, the CCP started forcefully addressing opium both in the rural areas where it was both produced and in the cities. There were different strategies for all the unique regions of China.

Those who did not cooperate knew that prison or immediate execution could result. The CCP, along with civilian volunteers, provided rehabilitation for some addicts who were willing to register themselves as offenders. It was acknowledged that kicking an opium addiction is hard. When possible, the government manipulated taxes and subsidies in such as way that farmers would choose to switch away from cultivating opium. The use of force was a reason for the success of the campaign, but people who were willing to cooperate often could find a way to transition away from their old habits.

The Communists did not just write laws and send soldiers. They held rallies that sound to me a lot like religious revival meetings. They galvanized millions of people to not just distain addictive drugs but to become volunteers for the cause. I would assume that many Chinese parents didn’t like opium in 1949 but were not yet so fervent as to become police informants. That changed in 1950. Everyone wants to have a moral cause. For some people today, it’s global warming. For millions in 1950’s China, it was eliminating opium distribution and addiction.

In one of my posts on Afghanistan I speculated that it is self-defeating for Americans to purchase illicit opium as consumers and also task our military with stamping out its production by force. This week when I read about the opium campaign, I found that a related message was used in 1950. The CCP presented opium abstinence as a way to defeat America in the Korean War.

I will be curious to watch developments concerning screen time and China. There is much to be determined. As Vice reported this week, ‘It’s unclear how the government will define “sissy pants”…’

Institutions Getting Smarter on Covid

Two weeks ago I argued for 4 non-coercive anti-Covid policies I thought were under-rated. I haven’t generally been impressed by the institutional response to the pandemic, and so I wasn’t expecting the policies I mentioned to get traction any time soon. But some did!

I argued for:

  1. Full vaccine approval
  2. Emergency vaccine approval for children
  3. Ventilation
  4. Outpatient treatments that work

Since then, the big news is that the FDA fully approved the Pfizer vaccine. This seems to have increased the pace of new vaccinations.

I really wasn’t expecting the FDA to move that fast- they have generally learned to be slow because Congress has been much more likely to complain about them approving a bad drug than about them denying or slow-walking a good drug. But Congress itself seems to be changing in response to Covid, with 108 House members pushing the FDA for a timeline on approving vaccines for 5 to 11 year-olds.

I don’t know of a good way to gauge progress on ventilation overall, but I was pleased to see HEPA filters show up in the classrooms at Providence College:

Likewise, I don’t know if Fluvoxamine prescriptions are up in the weeks since a good sized study showed it reduced Covid hospitalizations 31%, but the popular press articles about it keep coming (don’t be deterred by “Vox”, the linked article is by Kelsey Piper and its excellent).

So some institutions seem to be getting smarter, and perhaps coincidentally, we seem to be at the peak of the Delta wave. According to, Rt is now below 1 in 31 states, and falling in 45 states, including all of the Southern states hit hardest by Delta. Barring a new twist (another worse variant? Winter Delta wave in the North?), things just get better from here.

We need City-States

What happens when the world changes sufficiently that a subset of the institutions that laid the groundwork for the most successful nation of the last 200 years becomes becomes maladapted to their context? Well, thanks to a couple billion year of evolutionary biology, we know the possible outcomes. The classic evolutionary answer is that the species in question will either adapt, migrate, or die. Repurposed for the modern nation-state, the country in question will either:

  1. Adapt it institutions
  2. Change the context (i.e. whole nations can’t migrate)
  3. Steadily decline into some combination of irrelevance or chaos

Omar Wasow put together a nice thread, where each individual tweet stands wholly on it’s own as an acute observation, on the current state of the Senate as an elected institution:

So let’s think about our options here.

Decline into Irrelevance and Chaos

I mean, it’s a choice, but it’s not one I’m particularly excited about.


We could amend the constitution to change how the Senate is apportioned in some clever way that still maintains the mandated suffrage of every state. We could change/abolish the electoral college. I’ll be blunt: I don’t ever see a path forward for constitutional change that will entirely undermine the political power of the one of the major parties (good luck getting 2/3 of Senators to push through an Amendment that will undercut the careers of at least half of them). The resistance to it, at every level, will be extreme. The last time we tried to make an institutional change with that much impact on the balance of power, we had to fight a war to resolve it. There may be a path forward here, but not on a timescale that I’m interested in. I’m only interested in solutions that could be feasibly enacted in my lifetime.

Change the Circumstances

Unlike your typical seed-eating bird of the Galapagos Islands, we do have the means to change the map upon which the Senate is selected. In other words, more states. I don’t mean just granting statehood to Puerto Rico and DC (though it is mildly unconscionable that we haven’t done so already). And I don’t just mean (the very good and perfectly reasonable idea) of splitting California and Texas into 5 and 3 states. I mean a lot more states.

Let’s think about the underlying problem for a second. The Senate biasing representation towards a small minority of voters is a symptom of a larger phenomenon: the continued movement of Americans to dense urban areas. People keep moving to cities, and often from states without a major urban center, and into states with multiple large cities. The rural areas that they are emptying out from maintain their pool of slots for elected Senators, while the cities gain none. So what’s the answer?

Welcome to the great state of Seattle! [state motto: “If it’s not caffeinated, send it back”]

The Vinegar-Tomato Sauce State of Raleigh! [state color: halfway between Duke blue and UNC blue]

The Beechwood Aged State of St. Louis![ state left fielder: Lou Brock]

The Always Hustling State of Atlanta [state anthem: written and performed by Outkast]

City-states. Remember city-states!? Yes, I know, when we speak historically of city-states we mean entities independent of any other nation state – classic Venice, current Singapore or Monaco, but that doesn’t mean we can’t piggyback on their awesomeness. Texans already joke about the “People’s Republic of Austin” – let’s make it official! We can set a size minimum as either an explicit population threshold (e.g. 500k) or a moving bar, such as the population of the smallest state in the previous census. It’s essentially adding another option for a city to apply for inclusion in the next tier of our federalist system.

This is more feasible than you might think and vastly more feasible than amending the constitution.


  1. These cities already have government infrastructures. The governor on day 1 is the current sitting mayor.
  2. The citizens of most medium- and large-sized cities derive the bulk of their regional identity from their city, not their state. Most urbanites will be thrilled at the notion of elevating the political status of their city while losing the affiliation of their previous state.
  3. New state coffers will be heavily subsidized with flag and swag sales the first few years (only mostly kidding)
  4. The remaining rural states will have the far more manageable task of trying to serve rural citizens without having to serve an urban voter base with radically different needs and preferences. Public goods will be better matched with the citizens of rural states as well.
  5. States will often look like Swiss cheese, which will be both hilarious and, slightly less importantly, will allow for constituents to even more easily vote with their feet when elected officials fall short in their duties.

Are there downsides? Sure.

  1. The speed traps before you enter and as you exit city-states into their rural envelopers will be aggressively extractive. There will be rampant attempts at exporting taxes across borders.
  2. Reconstituting water supplies as special districts supporting multiple states will be tricky.
  3. Coordinating interstate public goods will, no doubt, at times become even more farcical than the status quo.
  4. Decent chance this turns into a Neal Stephenson novel within 100 years.

But, in the medium and long run, I believe the benefits will greatly outweigh the costs. Throughout the pandemic there has been a constant tension, particularly in “red states”, between the public goods desired by the citizens in cities versus rural areas. While urbanites have been desperate for mask and vaccine mandates, rural citizens have been far more interested in consuming personal liberty and symbolic group-identity goods, at the expense of greater Covid cases and deaths for those in denser areas.

I’ve said it before and I’ll keep saying it tomorrow: there isn’t a red-blue divide, a religious divide, or a class divide. America is currently defined by an urban-rural divide. If we don’t adapt our institutions to reflect it and balance the equal political enfranchisement of people on both sides of that divide, it will continue to erode the integrity of our political infrastructure.

I imagine I don’t have to persuade many people that the integrity of the franchise is not something to be taken lightly. Regardless of the mathematical salience of an individual vote to any election, the fact remains that the less people believe their vote has at least the potential to be realized in the form of representation that serves them, the more they will look to alternative channels to the political process. And maybe, for the libertarian inside of you, the alternative you imagine might exist in the private marketplace for goods and services. But history informs us that the dominant alternatives to democracy are heritable lineage and bloodshed, and I don’t see any benevolent American scions laying in wait.

The War of Ideas Isn’t Over

I have spent some of the last week educating myself about Afghanistan. You might ask where I was back when the US had a strategic advantage. I now regret the time spent at the paint store squinting at 200 different shades of white. Here’s an idea: America gets only 20 paint colors until we achieve our foreign policy objectives. 40? All I know is that we are past the optimal number of shades of white, considering what just happened.

A lot of the “takes” in the past week have been on the subject of blame. Despite the fact that American lives are still at risk in Afghanistan, this has not been a unifying event, like 9/11 was.

Are we picking our battles in such a way that helps vulnerable people? Any energy spent fighting your enemy B is a resource you cannot use to fight enemy C. Incidentally, that is one of the points that President Biden made in his speech on August 16th. There is an opportunity cost to mean tweets.

I reached out to a veteran friend of mine for insight last week. This is part of what he told me:

Biggest mistake is looking at Afghanistan as a single cohesive entity. It isn’t. There is no national identity. The Kyrgyz, Uzbeks, and Kazaks of the north … Karzai was a Pashtun and always ensured the main leadership roles were Pashtun.

He said that there are sub-units of Afghan people opposed to the Taliban who are upset by the advance we all witnessed to Kabul. Divided people lose, and then they don’t have the capacity to help others.

There was a time when the Taliban were few in numbers and hanging on the fringes. One advantage they had is that they went with the “legalize it, tax it” drug policy. Farmers under their jurisdiction can grow opium poppy and pay the Taliban a fee. In the American sphere of influence, we were fighting against the laws of supply and demand. The American public is not the only destination market for illicit opioids, but it’s a big one. It’s pretty self-defeating to ask our security forces to fight against drugs when most Americans can’t be bothered about them.

Consider the movie Little Miss Sunshine, a beloved American comedy. Consider the grandpa. He’s not a perfect man. He has his little vices, like dropping F-bombs in front of his young granddaughter. And, he snorts heroin. It’s easy to imagine what a great rapport he has with his dealer. No one would report his behavior to the police.* The drug habit is not portrayed as a virtuous thing, but overall he’s a sympathetic figure.

There is a lot of muddled thinking in our society when it comes to drugs. The bill comes due.

Humans are very creative. The good news is that we could have more discussions about drugs and experiment with new policies. It’s not inevitable that laws regarding drugs will be the same next year, but there is a lot of inertia that needs to be overcome. A society where celebrities joke openly about doing illegal drugs is not going to also be a society that can effectively “reshape the world in its image”, to quote Tyler.  

Tyler’s point is that this unfavorable outcome was not inevitable. From responses I read, many people offering opinions on Tyler’s article did not read past the headline. Nuance can’t be conveyed in a headline or a tweet. Tweet culture is a handicap right now, at a time when good complete ideas are badly needed. What happened in Afghanistan was complex. A tweet might be long enough to say what you would like to see happen, but it’s not long enough to help anyone.

The same Americans who tweet that they want refugees to live somewhere safe won’t go to a city council meeting and argue in favor of building high-density housing in their neighborhood. The same Americans who have tweeted that they hope the Taliban will build an “inclusive” society…

If you take the view that the failure in Afghanistan was inevitable, then Matt Y ’s explainer is ungated and helpful. There is also a lone voice saying that 20 years of “jail” had value.

If indeed this is a major crisis, then we are showing a lack of awareness when it comes to media. Some Americans alive today might not know about the role of media in fighting Nazis. Here is a fun read about that. In addition to WWII-era Brits, the Taliban are also strategic with media.

Considering that this is partly a war of ideas, I don’t know if taking Kabul so fast will look strategic in hindsight. There is much still to be determined. Had the Taliban consolidated power more incrementally, they would have been able to control the images that got out.

Here’s one image I won’t forget:

On the assumption that 20 times more people saw the image than liked it, this picture has been seen by well over 2 million people. Imagine how those girls’ lives have changed. “they are now with the Marines.” The entire world is breathlessly watching the airlift, and any abuses by the Taliban are headline news.

The media you choose to consume shapes the world around you. Every click is a vote for the kind of world you want. The war of ideas continues.

James Bailey here on information consumption (not on Afghanistan)

*It’s nothing glamorous or entertaining, but this is one approach to opioid use. As more parents lose children to fentanyl overdoses, more civic action is happening which generates publicity. Deaths from opioids increased rapidly after 2010. Little Miss Sunshine came out in 2006, so perhaps if it were made today they wouldn’t have taken such a cavalier approach to heroin.

Anti-coercive ways to fight Delta

Two weeks ago I predicted that Covid cases would continue to spike for at least two weeks due to the Delta variant, but argued against general shutdowns as a way to combat this spike. Two weeks later cases have indeed spiked, and while localities and organizations have been mandating masks and vaccines, we have largely avoided new lockdowns, at least in the US (Australia is reverting to its roots as a prison). In the last post I mostly said what we shouldn’t do to fight Delta, so today I want to show what a better response looks like.

The tendency of authorities to reach first for coercive solutions is a natural product of their incentives, but I’ve been disappointed to see the same tendency among the chattering classes. I think this is due to polarization- people are most interested in debating solutions that are identified with a specific side in politics or the culture war. Masks became blue-coded, so many reds oppose them even though they probably work. Likewise with vaccines, even though they definitely work well and funding them early was the greatest achievement of the Trump presidency. Meanwhile certain medications became red-coded, leading blues to oppose them before the evidence even came in. But many of the best non-coercive and anti-coercive solutions barely get discussed because they have no political valence, or a mixed one.

Fully Approve the Vaccines Already!

The Covid vaccines are still being distributed under an emergency use authorization. This lack of full approval is a source of vaccine hesitancy. More concretely, it also means that pharmaceutical companies aren’t allowed to advertize their vaccines, even though they are much more effective than the typical pharmaceutical you see advertized. The randomized control trials testing the vaccines have been complete for months, we are just waiting on the FDA to do their job.

Authorize Vaccines for Kids

The FDA still bans children under 12 from receiving the vaccine, saying they are waiting for more trial data. Last week, the American Academy of Pedicatrics argued that we have enough data to justify an Emergency Use Authorization for children aged 5-11 given, you know, the emergency. The government is going to make my 5 year old wear a mask to kindergarden won’t allow me (or my physician wife!) to get him a vaccine which would protect him and others much better than a mask.


Opening windows, modifying HVAC systems to bring in more outside air, and using air purifiers is about as effective as requiring masks and is definitely less of an imposition on people. But we don’t talk about it, partly because people took so long to recognize that Covid is spread through the air more than through droplets, and partly because it is less of an imposition on people and so never became a culture-war debate. Ventilation might be too boring to advocate but I think staying alive is very exciting.

Outpatient Treatments that Work

Repurposing existing drugs to fight Covid is a great idea that has not yet lived up to its promise, aside from the widespread use of Dexamethasone for inpatients with severe cases. The core problem is that it takes large randomized controled trials to really prove that a drug works, and these are expensive. Worse, pharmaceutical companies don’t want to pay for these expensive trials once their drug has gone off patent. This means that many promising treatments have been ignored, while a few have been over-promoted on the basis of observational studies and tiny RCTs (and worse, still promoted once large RCTs showed they probably don’t work). But the British government stepped up to fund the large trials that found Dexamethasone effective last year, and private donors have funded mid-size trials that just found Fluvoxamine reduced Covid hospitalization by 31%. This is excellent news because Fluvoxamine is a cheap and relatively safe anti-depressant that people can take at home. There are other promising treatments that have yet get funding for large RCTs; this is exactly the sort of thing that NIH should be throwing money at. While we’re waiting on compentent government, you can ask a doctor about outpatient treatment if you do get Covid.

Overall, many of our best tools for fighting Covid are being ignored despite, or perhaps because of, the fact that they maintain or increase our freedom.

Right now

When we make drugs illegal but continue to buy them in huge amounts, we make the world unstable. That’s only a small part of what is going on right now, but it’s worth saying.

Preferences for Equality and Efficiency

Most people would consider both equality and efficiency to be good. They are “goods” in the sense that more of them makes us happier.  However, in some situations, there is a trade-off between having more equality and getting more efficiency. Extreme income redistribution makes people less productive and therefore lowers overall economic output.

Examining the preferences people have for efficiency and equality is hard to do because the world is complicated. For example, a lot of baggage comes along with real world policy proposals to raise(lower) taxes to do more(less) income redistribution. A voter’s preference for a particular policy could be confounded by their personal feelings toward a particular politician who might have just had a personal scandal.

With Gavin Roberts, I ran an experiment to test whether people would rather get efficiency or equality (paper on SSRN). Something neat that we can do in a controlled lab setting is systematically vary the prices of the goods (see my earlier related post on why it’s neat to do this kind of thing in the lab).

One wants to immediately know, “Which is it? Do people want equality or efficiency?”. If forced to give a short answer, I would say that the evidence points to equality. But overly simplifying the answer is not helpful for making policy. The demand curve for equality slopes down. If the price of equality is too high, then people will not choose it. In our experiment, that price could be in terms of either own income or in group efficiency. We titled our paper “Other People’s Money” because more equality is purchased when the cost comes in terms of other players’ money.

The main task for subjects in our experiment is to choose either an unequal distribution of income between 3 players or to pick a more equal distribution. Given what I said above that people like equality, you might expect that everyone will choose the more equal distribution. However, choosing a more equal distribution comes at a cost. Either subjects will give up some of their own earnings from the experiment or they will lower the total group earnings. As is true in policy, some schemes to reduce inequality are higher cost than others. When the cost is low, we observe many subjects (about half) paying to get more equality. However, when the cost is high, very few subjects choose to buy equality.

This bar graph from our working paper shows some of the average behavior in the experiment, but it does not show the important results about price-sensitivity.

Continue reading

“Zoning Taxes” — The Cost of Residential Land Use Restrictions

Fascinating new working paper on why housing prices are so high in some markets, by Gyourko and Krimmel: “The Impact of Local Residential Land Use Restrictions on Land Values Across and Within Single Family Housing Markets.”

Key sentence from the abstract: “In the San Francisco, Los Angeles, and Seattle metropolitan areas, the price of land everywhere within those three markets having been bid up by amounts that at least equal typical household income.”

Economists, libertarians, and more recently “neoliberals” have long complained about land-use restrictions as a primary factor contributing to unaffordable housing. This paper provides some pretty solid data, at least for some housing markets.

Here’s a key chart from the paper, Figure 5. Notice that there is a lot of heterogeneity across cities. In San Francisco, land use restrictions add roughly four times the median household income to the price of housing. But in places like Columbus, Dallas, and Minneapolis, there is essentially no zoning tax. That’s not because these cities have no land use restrictions! It’s just that they aren’t currently binding.

The paper also notes that “zoning taxes are especially burdensome in large coastal markets.”

This is similar to what I showed in a very non-scientific map that I created (in about 5 minutes) for a Twitter thread that I wrote in January 2020 on housing prices. In that map and thread I pointed out that there are still lots of fine US cities where you can purchase homes for roughly 3 times median income (a commonly used rule of thumb for affordability).

Cities where you can buy the median house for about 3 times median income.

Will these cities continue to be affordable in the future? As demand increases, and supply-side restrictions remain in place, we would predict the same thing will happen to Columbus as happened to San Francisco. But probably not for decades.

So if you seek housing affordability, move to the Zone of Affordability! But let’s also work on reforming the rest of the country to make everywhere affordable.